Wall Street Regulators Are Set to Rewrite the Volcker Rule

Treasury Secretary Steven Mnuchin has identified the Volcker Rule as one of his top targets in the Trump administration’s efforts to ease financial regulation.

On August 2, 2017, the Acting Comptroller of the Currency, Keith Noreika opened the public comment process for the Office of the Comptroller of the Currency’s (OCC) efforts to change and revise the “Volcker Rule,” a Dodd-Frank Act regulation banning banks from investing and trading on their own behalf.1 The OCC said it “invites input on ways to tailor the rule’s requirements and clarify key provisions that define prohibited and permissible activities.”2 The agency has also asked for ways for Federal regulatory agencies to implement the existing rule more effectively without having to revise the original regulation.3

What this means

The Volcker Rule, named after former Federal Reserve Board Chair Paul Volcker, was intended to prevent risky “proprietary” trading, where banks and financial institutions invest their own capital to boost revenue.

The rule has been controversial from the start, with proponents arguing that the restrictions have made markets safer, while critics maintain it has made banks too conservative, prompting a retrenchment from certain markets and resulting in a negative effect on liquidity.4 Wall Street’s most frequent complaint is that it is unclear what the Volcker Rule bans, and arguing that it is practically impossible for regulators to discern what type of trading is barred, while other activity, such as market making, remains acceptable.5

Treasury Secretary Steven Mnuchin has identified the Volcker Rule as one of his top targets in the Trump administration’s efforts to ease financial regulation.6 At a meeting of the Financial Stability Oversight Council (FSOC) on July 27, 2017, which Mnuchin heads, and is comprised of the five regulatory agencies responsible for enforcing the Volcker Rule, the Federal Reserve (Fed) , the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the OCC, potential changes were discussed.7 “A bipartisan consensus has emerged that the Volcker Rule needs clarification and recalibration to eliminate burden on banks that do not engage in covered activities and do not present systemic risks,”8 Noreika pointed. In June, the Treasury released the first of four reports in response to the Trump administration’s Core Principles Executive Order, and in it recommended changes to the current Volcker Rule, including exempting banks with less than $10 billion in assets, so easing compliance requirements for smaller banks, and loosening restrictions on banks investing in private equity and hedge funds.9

Conclusions

Trump’s election, and the appointment of bank-friendly regulators has raised expectations on Wall Street that the Volcker Rule would be changed.10 Treasury Secretary Mnuchin while not objecting to Congress attempting to repeal Volcker, added that the Treasury was working with regulators to clarify and fix it. “We had a thorough and constructive dialogue on the Volcker Rule,”11 Mnuchin said, when asked about the July 27 FSOC meeting, adding, “During the discussion, the FSOC member agencies shared many good ideas on how the Volcker Rule could be improved.”12 As one of the five member agencies of the FSOC charged with writing and enforcing the Volcker Rule, the OCC is seeking input on ways to better implement the existing rule, without going through the complicated and lengthy process of rewriting the regulation.13

The OCC is accepting comments for 45 days, and regulators are hoping to finish a proposal by the end of the year. Treasury Secretary Mnuchin, as head of the FSOC is encouraging other regulators to reconsider the current rule, and has said he supports the rule “in principle” but not without substantial changes.14 While Noreika’s move is the first formal step by any regulator to begin the process of rewriting the regulations, regulators across multiple agencies widely agree that the Volcker Rule needs to be fixed.15 While regulators hope to draft a proposal by the end of the year, revising the rule will face administrative processes at each of the five agencies.16 The original rule took more than three years to finish, and any replacement would need to go through a formal joint proposal before it could be finalized by all five regulators.17 However, regulators aligned with the Trump administration, such as Jay Clayton at the SEC, and Randy Quarles at the Fed, have indicated they will be guided by Treasury Secretary Mnuchin’s June report calling for “significant changes” to the rule.18

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